Paycheck Protection Program (PPP) FAQ Updated with Guidance on Necessity Certification and EligibilityMay 14, 2020
UPDATE (May 14, 2020): The FAQ has been updated by adding a new FAQ #47, which extends the “safe harbor” repayment deadline for PPP loans from May 14, 2020 to May 18, 2020 in order "to give borrowers an opportunity to review and consider FAQ #46."
On May 13, 2020, the Small Business Administration (SBA) updated the Paycheck Protection Program Frequently Asked Questions (FAQs) (the “FAQ”) to provide much needed guidance for borrowers under the Paycheck Protection Program (PPP) administered by SBA.
All PPP borrowers are required to certify in their PPP loan applications that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” We refer to this certification in this alert as the “necessity certification.” As discussed in our prior alert (for our full PPP coverage, click here), FAQ #31 raised concerns for potential applicants as to whether they could qualify for a PPP loan, and for existing borrowers as to whether they properly borrowed their PPP loans.
This update to the FAQ comes one day before SBA’s previously-announced deadline of May 14, 2020 (which was extended from the original deadline of May 7, 2020) for any borrower who repays its PPP loan in full to be deemed by SBA to have made the necessity certification in good faith. When SBA extended the deadline to May 14, 2020, SBA announced that “SBA intends to provide additional guidance on how it will review the certification prior to May 14, 2020.” It appears FAQ #46 is the additional guidance intended to address concerns raised by FAQ #31.
The updated FAQ from SBA now includes the following new FAQ #46:
46. Question: How will SBA review borrowers’ required good-faith certification concerning the necessity of their loan request?
Answer: When submitting a PPP application, all borrowers must certify in good faith that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” SBA, in consultation with the Department of the Treasury, has determined that the following safe harbor will apply to SBA’s review of PPP loans with respect to this issue: Any borrower that, together with its affiliates,20 received PPP loans with an original principal amount of less than $2 million will be deemed to have made the required certification concerning the necessity of the loan request in good faith.
SBA has determined that this safe harbor is appropriate because borrowers with loans below this threshold are generally less likely to have had access to adequate sources of liquidity in the current economic environment than borrowers that obtained larger loans. This safe harbor will also promote economic certainty as PPP borrowers with more limited resources endeavor to retain and rehire employees. In addition, given the large volume of PPP loans, this approach will enable SBA to conserve its finite audit resources and focus its reviews on larger loans, where the compliance effort may yield higher returns.
Importantly, borrowers with loans greater than $2 million that do not satisfy this safe harbor may still have an adequate basis for making the required good-faith certification, based on their individual circumstances in light of the language of the certification and SBA guidance. SBA has previously stated that all PPP loans in excess of $2 million, and other PPP loans as appropriate, will be subject to review by SBA for compliance with program requirements set forth in the PPP Interim Final Rules and in the Borrower Application Form. If SBA determines in the course of its review that a borrower lacked an adequate basis for the required certification concerning the necessity of the loan request, SBA will seek repayment of the outstanding PPP loan balance and will inform the lender that the borrower is not eligible for loan forgiveness. If the borrower repays the loan after receiving notification from SBA, SBA will not pursue administrative enforcement or referrals to other agencies based on its determination with respect to the certification concerning necessity of the loan request. SBA’s determination concerning the certification regarding the necessity of the loan request will not affect SBA’s loan guarantee.
Footnote 20 to the FAQ states: “For purposes of this safe harbor, a borrower must include its affiliates to the extent required under the interim final rule on affiliates, 85 FR 20817 (April 15, 2020).”
Based on FAQ #46, borrowers whose PPP loans (when aggregated with the PPP loans of its affiliates) are less than $2 million can take comfort that they will likely not face scrutiny by SBA and Treasury regarding the necessity certification.
Unfortunately, borrowers whose PPP loans (again, when aggregated with the PPP loans of its affiliates) are greater than $2 million are left largely in the same place that they were prior to the issuance of FAQ #46, as FAQ #46 does not provide any additional guidance as to how SBA will evaluate whether a particular borrower can make the necessity certification. For example, FAQ #46 does not provide any additional guidance as to how to apply FAQ #31, which advises that borrowers must make the necessity certification “in good faith, taking into account their current business activity and their ability to access other sources of liquidity sufficient to support their ongoing operations in a manner that is not significantly detrimental to the business,” for a particular borrower’s circumstances (see our prior alert for a more detailed discussion of FAQ #31).
However, such borrowers should take comfort from FAQ #46 in that the most likely outcome of SBA finding that a borrower lacked an adequate basis to make the necessity certification is a demand to repay the PPP loan in full (and thus a denial of any forgiveness). As stated in FAQ #46:
If SBA determines in the course of its review that a borrower lacked an adequate basis for the required certification concerning the necessity of the loan request, SBA will seek repayment of the outstanding PPP loan balance and will inform the lender that the borrower is not eligible for loan forgiveness. If the borrower repays the loan after receiving notification from SBA, SBA will not pursue administrative enforcement or referrals to other agencies based on its determination with respect to the certification concerning necessity of the loan request.
While it would seem that FAQ #46 would likely preclude SBA from pursuing other enforcement actions or from making referrals to other agencies against a borrower that repays its PPP loan following demand, it is not necessarily binding on other governmental agencies.
With the May 14, 2020 deadline looming, borrowers with loans under $2 million can take comfort under FAQ #46 that the basis for which they made the necessity certification will likely not be challenged, while borrowers with loans over $2 million should consider whether they should take advantage of the opportunity to repay their PPP loans by this deadline to avoid a review by SBA in light of the CARES Act, PPP regulations, and official guidance.
Lewis Rice will continue to monitor these developments and provide updates as needed.
Our attorneys are closely monitoring these developments as they occur and will make regular updates to our COVID-19 Resource Center. If you have any questions about the implications and disruptions of COVID-19 on your business, please reach out to one of the authors above or another member of the Task Force.